November 8, 2001 4:00 AM PST
Forecasts clash on year-end e-tail sales
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Surveys from research firms such as Jupiter and Nielsen/NetRatings are predicting gangbusters growth in online shopping again this holiday season, but the numbers don't jive with predictions from individual e-tailers such as Amazon.com and eBay. Analysts say the sketchy nature of predicting consumer confidence, as well as some lowballing by companies nervous about reaching Wall Street estimates, could be to blame.
Nielsen/NetRatings has said it expects online spending will reach about $10 billion for the 2001 holiday season, up 43 percent from last year.
Jupiter has announced an even more bullish forecast; including travel sales, it sees holiday online retail sales reaching $11.9 billion.
But Amazon, the top shopping site last year in terms of unique visitors, according to Jupiter Media Metrix, predicted that it would see flat growth to 10 percent growth compared with last year.
eBay, meanwhile, has forecast growth of around 5 percent to 10 percent for the fourth quarter from the third quarter, which is below historical norms; in 2000, fourth-quarter revenue was up almost 20 percent from the third quarter.
And Barnes&Noble.com said its fourth-quarter net sales are expected to range from $110 million to $135 million, which means they could fall below last year's sales of $114 million.
"Nielsen's forecast seems pretty bullish in terms of what individual companies are saying," said SoundView Technology analyst Shawn Milne.
What disturbed Wall Street analysts most was the size of the discrepancy and the wide variety of overly optimistic forecasts in different reports.
The expectations gap
"There's a pretty big gap between (what companies are saying) and a 40 to 45 percent increase," said Bear Stearns analyst Jeffrey Fieler. "I've seen some of the surveys, and thus far they've all been in the opposite direction of the trend we've seen."
A report from Goldman Sachs analyst Anthony Noto, done in conjunction with Harris Interactive and Nielsen/NetRatings, was by far the most moderate, but even it called for growth of 20 percent to 25 percent from last year.
Fieler thinks growth will be only 20 percent at best. Even considering only the positive factors, he believes growth wouldn't have a hope of hitting 40 percent.
Online retailers have a lot of good things going for them this year: The number of Internet users has grown overall; the percentage of people buying online is around 45 percent, up from 20 percent three years ago; and the average consumer is spending more.
"My sense is that those factors, in the absence of the macroeconomic pressures, would bring growth of 30 to 35 percent," Fieler said. But with the overwhelming negative force of the economy, that number will likely be cut in half, he added.
Lori Iventosch James, director of e-commerce research at Harris Interactive, who helped produce the report with Goldman Sachs' Noto, thought most of the other firms' forecasts were too high.
"I think we're going to see something in between," she said, referring to Nielsen's high of 43 percent and the Goldman Sachs low of 20 percent.
The discrepancy between these surveys and their inconsistency with what individual companies are saying may be explained by a combination of three factors: the methodology of the surveys, the unrealistically low aims of the retailers, and the unavoidable shortcomings of statistical surveys.
Madness in their methods?
"You get these discrepancies when you do top-down vs. bottom-up analyses," said Fieler, explaining that surveys based on what people say they plan to do are bound to differ from projections companies make based on what has already occurred.
Analysts compiled information from various sources, and individual surveys included a mish-mash of data such as executive surveys, advertising metrics and customer polls. Jupiter's survey polled 2,444 respondents, and Harris Interactive's included a survey of 500 online shoppers. But all of them run up against the same problem.
"Survey sampling of a propensity to buy is difficult," said SoundView's Milne, who plans on releasing his own predictions based on an independent third-party survey.
Analysts compared the ability to predict holiday shopping to the futility of gauging consumer confidence, something the Commerce Department attempts to do every month in what has been a series of fluctuating reports this year.
The fact that all the holiday surveys use different sources of data should give credence to their findings, James said. But she added: "I think because this is based on consumers, the difference between intentions and actuality usually involves a big gap. Plans are usually somewhat inflated."
Analysts said forecasting firms are also off the mark with some of their predictions about the effects that the terrorist attacks of Sept. 11 may have on online holiday shopping, partly because the climate has changed since they made their predictions, and partly because they made some blunders in their reasoning.
According to the Goldman Sachs report, 5 percent of consumers surveyed said they would shift their purchases this year to online retailers from brick-and-mortar stores due to fear of terrorism. But that report, though it came out Nov. 5, was based on data culled before Oct. 27, the day before the first postal worker tested positive for anthrax in New Jersey, sparking a new set of terrorism fears.
"The cocooning effect is probably offset because of concerns about mail security," Milne said.
Jupiter's report speculates that "because fewer Americans will travel by air this year, and those that do will be less likely to carry armloads of packages through tight airport security, there's an increased likelihood that consumers will buy from catalog retailers."
Fieler said he doesn't believe postal problems will deter consumers from ordering online or sending gifts through the mail. "More people are checking to see who their packages are from, but it ends there."
He added: "I thought the idea that people would change their buying patterns as a result of Sept. 11 is ridiculous. You'd have to have the Mall of America bombed in Minnesota and the Galleria in Houston blown up before that happened. Just look at all the people going to stadiums for sporting events."
A lowball's chance
The other explanation for the wide gap between survey predictions and actual companies' forecasts is a nervousness that has resulted from the harsh economic climate.
"Companies have tried to mute expectations," Fieler said. "Amazon is telling people to expect flat to 10 percent growth over last year, and eBay is predicting 5 to 10 percent growth." That would be well below their historical norms, Fieler said.
"They're probably lowballing the numbers," James said of Amazon and eBay. "Merchants are being conservative in this economic environment."
Amazon itself admitted that it isn't using reliable historical evidence to predict its performance this year.
Amazon spokesman Bill Curry said the company's projections for the fourth quarter were based on recent order trends, not historical growth trends in the holiday season. "If we looked at past holiday seasons, growth has been exponential over the past years. We've had fourth quarters of phenomenal growth," Curry said. "But we're in a different economy now."
Amazon is under particularly intense scrutiny this quarter as it has promised to achieve profitability; analysts are saying the fourth quarter is so important it could make or break the company.
Curry also said the company gave its guidance Oct. 23--"That was awhile ago." However, the company traditionally does not update its projections based on trends it sees early in the season.
What makes these companies' modest projections even more unrealistic is the drastic changes in the sector that have cut out many players, leaving the few survivors in a much better position to profit. After a rash of bankruptcies and consolidations in the online retail world, customers have fewer sites to visit for their holiday shopping.
Several of last year's top-performing online stores have either gone bankrupt, like eToys, or have been subsumed by a competitor, like Half.com, which was purchased by eBay. And Buy.com was delisted from the Nasdaq.
Companies also are in a better position now that they have finally worked out the technical kinks that aggravated shoppers in holiday seasons past. "The big problem in the past was the abandonment of shopping carts. Now companies have done studies and made changes to prevent that," Fieler said.
There also are special promotions this year, such as Amazon's deal with Citibank to lure customers. "That's highly promotional. Its equivalent to the car companies offering zero percent financing. It's a 50-50 effort to increase sales," Fieler said.
The margin of error
In the end, forecasting always involves an element of error, and most companies have come to accept that.
"When you take a Nielsen/NetRatings survey, the problem is that what people plan to spend always ends up being higher than what they actually do spend," Fieler said.
And that should be no surprise to anyone who's checked out the accuracy of such forecasts in the past. In its September forecast for the 2000 shopping season, Jupiter predicted sales of $12 billion. Actual sales came in at $10.8 billion.
Most of the research firms' clients don't take the surveys at face value anyway, James said. "Most of the big e-tail and retail companies are interested in what we think they're going to do, but they factor our info in with their own intelligence."
Added Amazon's Curry, "We're aware of them. (But) it's not our business to figure out which forecasts are right."